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21 October 04
Ponzi payback could fall to schools
Fitness scam: Trustee says early investors, including
many Utah schools, should reimburse those left short when the money ran out
Linda Fantin
The Salt Lake Tribune
Salt Lake Tribune
Utah schools could be forced to return millions of
dollars to the National School Fitness Foundation even though the bankrupt
charity still owes them money and a grand jury says the schools are victims of
an elaborate scheme.
The money is owed to schools in other states such as Minnesota
that purchased fitness equipment expecting refunds from the foundation, but
received less money back from the foundation than did schools in Utah, according
to a U.S. bankruptcy trustee in charge of the foundation.
Call it robbing Sanpete to pay St. Paul.
Trustee Kim Moser insists in an Oct. 15 court filing that it
is not fair that early investors in the foundation's fitness program received
full repayment while later investors got nothing - especially because the first
to sign up were paid with money from latecomers. In all, 600 schools in 20
states paid $114 million for fitness equipment and received a total of $31.6
million in reimbursements. That averages out to be 28 percent of the purchase
price per school.
If Moser's proposal is approved by a bankruptcy judge,
203 of the 350 districts involved nationwide would receive funds and 147 would
pay. Of the 30 districts in Utah that participated, only Rich and Uintah would
get more money.
"We would have to come up with close to $190,000, and
that's something we just couldn't afford right now," said Paul Gott-
fredson, business administrator for South Sanpete School District. It is the
only Utah district to receive full reimbursement for its fitness equipment.
"We're totally at the mercy of the court and trustee. We've all agreed to
get an attorney and fight this. But I'm not convinced we'll be successful."
It's quite a reversal of fortunes for Gottfredson and other
Utah officials who believed they were among the lucky ones in the fitness
equipment fiasco. Participating schools took out loans for $150,000 to $230,000
and in return received a roomful of exercise equipment, lesson plans and a
computerized system to track student progress. But the real selling point was
the promise of full reimbursement from the foundation.
The problem is the nonprofit, which claimed to be flush with
federal grants and private contributions, was getting kickbacks from the maker
of the fitness equipment - School Fitness Systems - and was using the money to
make monthly payments to its existing clients. Because Utah schools were among
the first to sign up, they got more money.
Joseph Mont Beardall, president of School Fitness Systems, has
pleaded guilty to fraud and is cooperating with federal investigators. Based in
part on Beardall's testimony, a grand jury on Tuesday indicted the foundation's
former president, Cameron Lewis, and his father, San Juan County Commissioner Ty
Lewis, on multiple counts of money laundering as well as mail, wire and bank
fraud.
The indictment alleges the foundation failed to tell schools
about the lack of fund raising and the foundation's precarious financial
condition. Nor did the charity say that reimbursements were really kickbacks
from School Fitness Systems. Federal prosecutors in Minnesota are calling it one
of the largest Ponzi schemes in U.S. history.
Attorneys for Cameron Lewis and the foundation strongly
dispute the allegations. Schools were told that reimbursements were contingent
upon available funds, and they got the equipment that they paid for, the
attorneys say.
Many school officials agree.
"This was not a normal Ponzi scheme," said Garfield
School District business manager D'Lynn Poll. "We did not make some huge
profit. We were told we would be reimbursed."
Garfield received 69 percent of its money back and had to
scrape to cover the shortfall. Poll, for one, does not think Utah schools should
be penalized twice.
Nor does Peter Billings, an attorney representing Alpine,
Jordan, Granite and Davis school districts that were left owing more than $6
million in loans when the foundation folded. Schools in those districts are
conducting fund-raisers to cover the shortfall. Billings said schools
were not greedy investors looking to make a buck, and Moser would have a hard
time proving otherwise. A better solution, he said, would be for Utah schools to
sign a waiver agreeing not to sue the foundation for the rest of their
reimbursements. That would reduce the pool of creditors and increase the money
available to out-of-state schools, Billings said.
"Everyone is in pain, especially the schools that came
in late," Billings said. "But if this is litigated, it's going to be
extremely expensive for all sides. It's a real mess."
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